Self-Funded Coverage - Overview

Principal Life Insurance Company offers self-funded dental, short-term disability (STD) and vision coverage. Self-funded coverage complements our fully insured products, is easy to understand and is available to employers having 50 or more eligible employees.*

* Employers with fewer than 1,000 employees must purchase at least one insured product. Standalone, self-funded options are available to employers having 1,000 or more employees.

Definition

Employers may choose from several methods to fund their group dental, vision and short-term disability benefits, including a fully insured method and a self-funded method.

With a fully insured benefit, the employer pays premium to Principal Life. We assume the risk for all claims. We also hold reserves to cover run-out claims and expenses upon termination. Run-out, also called lag claims, are claims incurred before the benefit termination date but reported after the benefit termination date.

An insured benefit limits liability to a total monthly premium. Employers can budget their monthly and annual expenses in advance.

With a self-funded benefit, employers assume the risk for claims and hold funds to cover all claim costs until they are actually needed to pay claims. Principal Life provides administrative services and pays claims from a bank account the employer establishes to fund the benefit. The employer pays us an administrative fee.

Because the employer assumes liability for all claims and expenses, monthly costs will vary. They cannot be precisely predicted and budgeted in advance

Advantages

Advantages of choosing self-funding include:

Improved cash flow – The employer holds all funds needed to pay claims. This improves their cash flow because they make funds available to the benefit bank account only as needed to cover paid claims. The employer also holds reserves needed to cover 90 day run-out claims upon termination. They can use these funds until they are actually needed to pay future claims.

Full service – Principal Life provides claim payment, contract writing, underwriting evaluation, administration and all other services.

Tax savings – Most states do not collect premium tax on self-funded benefits. This represents a savings to the employer.

Considerations

With self-funded, the employer assumes the risks normally assumed by Principal Life under a fully insured benefit. The employer should carefully consider these risks before selecting a self-funded arrangement:

Complete Assumption of Benefit Costs – The employer assumes complete financial responsibility for the cost of their benefit payments and expenses. The employer must cover the entire cost of higher than expected claims and expenses that may occur during the life of the benefit coverage.

Budgeting – Total monthly self-funded coverage costs (claims and expenses) vary from month to month. This makes budgeting more difficult than an insured benefit where monthly premium represents total liability.

Third-Party Responsibility – The employer is the sole benefit sponsor under a self-funded arrangement. We act only as the benefit administrator. As a result, the liability of the coverage and its operation rest with the employer. The benefit booklet furnished to employees states the employer is responsible for funding the benefit.

Special Trust Arrangement – If the employer’s employees contribute toward the cost of the benefit coverage, the self-funded coverage is subject to ERISA Trust requirements. This means the employer may be required to make special trust arrangements to protect the employees’ contributions.

Financials – Since the financial position and stability guarantee the employer’s employee benefits, we must evaluate the employer’s recent financial statements.

HIPAA Excepted – To ensure proper handling, self-funded dental and vision accounts need to be considered HIPAA excepted. To be considered HIPAA excepted, dental/vision self-funded offerings cannot be an integral part of the health plan. Therefore, participants must have the right to elect or decline dental/vision coverage.

This publication is intended to provide accurate and authoritative information in regard to the subject matter covered. The accuracy of the information is not guaranteed and is provided with the understanding that The Principal is not rendering legal, accounting, or tax advice. While this communication may be used to promote or market a transaction or an idea that is discussed in the publication, it is not a marketed opinion and may not be used to avoid penalties under the Internal Revenue Code. You should consult with appropriate counsel or other advisors on all matters pertaining to legal, tax, or accounting obligations and requirements.